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6. Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis.

Author

Cole, Harold L, Neuhann, Daniel, and Ordoñez, Guillermo

Subjects
EUROPEAN Sovereign Debt Crisis, 2009-2018, GOVERNMENT securities, SECONDARY markets, INVESTORS, PUBLIC debts, COUNTERPARTY risk, ARBITRAGE
Abstract

We develop a theory of information spillovers in sovereign bond markets in which investors can learn about default risk before trading in primary and secondary markets. If primary markets are structured as multi-unit discriminatory-price auctions, an endogenous winner's curse leads to strategic complementarities in information acquisition. Shocks to default risk in one country may trigger crisis episodes with widespread information acquisition, sharp increases in the level and volatility of yields in risky countries, low and stable yields in safe countries, market segmentation, and arbitrage profits between primary and secondary markets. These predictions are consistent with the dynamics of auction informativeness during the Eurozone Sovereign Debt Crisis, which we measure using the reaction of secondary market yields to primary market yields. [ABSTRACT FROM AUTHOR]

Published
2025
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19. Banks as Secret Keepers

Author

Dang, Tri Vi, Gorton, Gary, Holmström, Bengt, and Ordoñez, Guillermo

Published
2017

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